What is FIF (Foreign Investment Fund)?

The Foreign Investment Fund (FIF) regime in subpart EX of the Income Tax Act 2007 captures NZ tax-residents' holdings in foreign company shares, foreign superannuation interests, foreign mutual funds, and foreign-life-insurance investment elements above a NZ$50,000 cost-basis threshold.

The threshold test: NZ$50,000 total cost basis across all FIF-attributable investments at any point during the income year. Below the threshold, foreign holdings fall under standard NZ rules (dividends taxed on receipt; capital gains generally not taxable for non-trader investors). Above the threshold, FIF applies to all attributable investments.

Calculation methods (Income Tax Act 2007 sections EX 44-58): 1. Fair Dividend Rate (FDR) — 5% of opening market value (the default for most listed-share holdings). 2. Comparative Value — actual change in market value over the year + distributions, less an inflation adjustment. 3. Cost Method — 5% of cost basis (when market value cannot be determined). 4. Deemed Rate of Return (DRR) — 7% fixed prescribed rate (for non-attributing fund interests).

Exclusions (section EX 31): ASX-listed Australian shares that are resident in Australia for tax purposes, on the ASX 300 index, and not stapled with other instruments.

Why FIF matters for AIP applicants: AIP applicants arrive in NZ with overseas portfolios. As tax-residents (under section YD 1), they would normally face FIF taxation on the overseas portion of their holdings immediately. The transitional resident exemption (section HR 8) gives 48 months of grace — but the foreign portfolio falls back into the FIF regime when HR 8 expires.

Worked example: AIP applicant with NZ$5M Australian-listed portfolio (excluded under EX 31 if ASX 300) + NZ$2M US-listed portfolio (FIF-attributable) + NZ$1M UK pension (FIF-attributable). HR 8 covers all of this for 48 months. After HR 8: - ASX 300 holdings: continue to be EX 31 excluded — standard dividend treatment. - US holdings (NZ$2M cost basis × 5% FDR): NZ$100K of deemed income per year, taxable at marginal rate (up to 39% = NZ$39K NZ tax per year), even if no distributions received. - UK pension: depends on whether acquired pre or post 1 April 2014 transitional rules.

Restructuring options before HR 8 expiry: - Sell foreign holdings tax-free during HR 8 and repurchase NZ-domiciled wrappers (PIE managed funds, NZX equities, NZ bank deposits). - Use foreign superannuation transfer windows under section CF 3 for QROPS-eligible UK pension transfers. - Maintain ASX 300 exposures (EX 31 excluded) without restructuring.

Annual compliance post-HR 8: file IR3 with IR3F supplementary forms detailing FIF holdings + chosen calculation method. The election is annual; methods can change year-on-year subject to the section EX 51 conditions.